rental income: Schedule C or E

Discussion in 'Tax' started by John Kohl, Aug 15, 2003.

  1. John Kohl

    John Kohl Guest

    My wife and I bought a condominium at a ski resort, which we
    intend to rent out through the resort's short-term rental
    office. The resort will issue us a 1099 for the rental
    income. We expect to qualify under the "dwelling unit used
    as home" rules since we'll use the unit for some days for
    personal use.

    We provide electricity, heat, water, phone, and cable TV.
    The resort provides cleaning and linen services for renters
    (essentially hotel-like maid services), and charges us a
    commission (percentage of nightly room rate).

    IRS Pub 527 (2002) says:

    If you rent buildings, rooms, or apartments, and provide only
    heat and light, trash collection, etc., you normally report your
    rental income and expenses in Part I of Schedule E (Form 1040).
    However, do not use that schedule to report a not-for-profit
    activity. See Not Rented For Profit, earlier.

    If you provide significant services that are primarily for your
    tenant's convenience, such as regular cleaning, changing linen,
    or maid service, you report your rental income and expenses on
    Schedule C (Form 1040), Profit or Loss From Business or Schedule
    EZ, Net Profit From Business.

    I don't know from the language & facts here whether my wife
    and I are considered to provide the maid services, and thus
    this income goes on Sch. C, or if we are only considered to
    provide utilities (and the rental office provides the maid
    service), and thus this income goes on Sch. E.

    (Which is more advantageous to us?)

    --
    John Kohl <>
    Hacking on NetBSD/i386 on occasion. See also <http://www.NetBSD.org/>.

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    John Kohl, Aug 15, 2003
    #1
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  2. John Kohl

    D. Stussy Guest

    John Kohl wrote:

    > My wife and I bought a condominium at a ski resort, which we
    > intend to rent out through the resort's short-term rental
    > office. The resort will issue us a 1099 for the rental
    > income. We expect to qualify under the "dwelling unit used
    > as home" rules since we'll use the unit for some days for
    > personal use.
    >
    > We provide electricity, heat, water, phone, and cable TV.
    > The resort provides cleaning and linen services for renters
    > (essentially hotel-like maid services), and charges us a
    > commission (percentage of nightly room rate).
    >
    > IRS Pub 527 (2002) says:
    >
    > If you rent buildings, rooms, or apartments, and provide only
    > heat and light, trash collection, etc., you normally report your
    > rental income and expenses in Part I of Schedule E (Form 1040).
    > However, do not use that schedule to report a not-for-profit
    > activity. See Not Rented For Profit, earlier.
    >
    > If you provide significant services that are primarily for your
    > tenant's convenience, such as regular cleaning, changing linen,
    > or maid service, you report your rental income and expenses on
    > Schedule C (Form 1040), Profit or Loss From Business or Schedule
    > EZ, Net Profit From Business.
    >
    > I don't know from the language & facts here whether my wife
    > and I are considered to provide the maid services, and thus
    > this income goes on Sch. C, or if we are only considered to
    > provide utilities (and the rental office provides the maid
    > service), and thus this income goes on Sch. E.
    >
    > (Which is more advantageous to us?)


    If you meet the 14-day or less rule, then you use Schedule A
    for your interest expense and property taxes, and get to
    completely ignore the income. - IRC 280A(g)

    Schedule C is for "hotel" arrangements. Schedule E is for
    "apartment" or long term lease situations. That's what the
    publication is getting at. In either of those cases, you
    have to include the income, but (except for interest and
    property taxes) cannot take a loss. Excess expenses carry
    forward in a manner similar to that of Form 8829 (the only
    difference is that if you use Schedule E, you cannot
    actually file that form with your return).

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    D. Stussy, Aug 16, 2003
    #2
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  3. John Kohl <> wrote:

    > My wife and I bought a condominium at a ski resort, which we
    > intend to rent out through the resort's short-term rental
    > office....
    > We provide electricity, heat, water, phone, and cable TV.
    > The resort provides cleaning and linen services for renters
    > (essentially hotel-like maid services), and charges us a
    > commission (percentage of nightly room rate)....


    In my lay opinion, it's Schedule E. The difference is the
    difference between income derived from your property (goes
    on E) and income derived from your labor (goes on C). You
    aren't providing any of the services; you're paying the
    resort to provide them -- and you're not even paying them
    for their labor, you're paying a commission on the rate. The
    sort of person who reports this kind of income on Schedule C
    is a hotel owner, who provides these services directly,
    using his own labor or the labor of his employees or
    contractor.

    --
    Chris Green

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    Christopher Green, Aug 17, 2003
    #3
  4. "John Kohl" <> wrote:

    > My wife and I bought a condominium at a ski resort, which we
    > intend to rent out through the resort's short-term rental
    > office. The resort will issue us a 1099 for the rental
    > income. We expect to qualify under the "dwelling unit used
    > as home" rules since we'll use the unit for some days for
    > personal use.
    >
    > We provide electricity, heat, water, phone, and cable TV.
    > The resort provides cleaning and linen services for renters
    > (essentially hotel-like maid services), and charges us a
    > commission (percentage of nightly room rate).
    >
    > IRS Pub 527 (2002) says:
    >
    > If you rent buildings, rooms, or apartments, and provide only
    > heat and light, trash collection, etc., you normally report your
    > rental income and expenses in Part I of Schedule E (Form 1040).
    > However, do not use that schedule to report a not-for-profit
    > activity. See Not Rented For Profit, earlier.
    >
    > If you provide significant services that are primarily for your
    > tenant's convenience, such as regular cleaning, changing linen,
    > or maid service, you report your rental income and expenses on
    > Schedule C (Form 1040), Profit or Loss From Business or Schedule
    > EZ, Net Profit From Business.
    >
    > I don't know from the language & facts here whether my wife
    > and I are considered to provide the maid services, and thus
    > this income goes on Sch. C, or if we are only considered to
    > provide utilities (and the rental office provides the maid
    > service), and thus this income goes on Sch. E.
    >
    > (Which is more advantageous to us?)


    The starting point is simple - what is the AVERAGE rental
    period? If it is 7 days or less you MUST use Schedule C,
    more than 7 days and you get to use Schedule E. The math
    isn't hard.

    BTW - if you find that the average rental period is 7 days
    or less RUN, do not walk, to a qualified pro that
    understands passive loss activity rules. Schedule C passive
    rentals are not for the uninitiated.

    Good luck,
    Gene E. Utterback, EA

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    Gene E. Utterback, EA, Aug 20, 2003
    #4
  5. John Kohl

    MAT1040X Guest

    > The starting point is simple - what is the AVERAGE rental
    > period? If it is 7 days or less you MUST use Schedule C,
    > more than 7 days and you get to use Schedule E. The math
    > isn't hard.
    >
    > BTW - if you find that the average rental period is 7 days
    > or less RUN, do not walk, to a qualified pro that
    > understands passive loss activity rules. Schedule C passive
    > rentals are not for the uninitiated.


    Gene - Could you elaborate on this a little. Is there a
    code section or regulation that spells out the "average 7
    day rental" that requires special treatment? Thanks.

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    MAT1040X, Aug 21, 2003
    #5
  6. >> The starting point is simple - what is the AVERAGE rental
    >> period? If it is 7 days or less you MUST use Schedule C,
    >> more than 7 days and you get to use Schedule E. The math
    >> isn't hard.
    >>
    >> BTW - if you find that the average rental period is 7 days
    >> or less RUN, do not walk, to a qualified pro that
    >> understands passive loss activity rules. Schedule C passive
    >> rentals are not for the uninitiated.


    > Do the passive loss activity rules apply to the operation of
    > a small motel?


    They apply to ALL for profit activities.

    > Is motel operation considered short-term
    > rental activity or a business activity?


    I would suspect the average stay at a motel is less than
    seven days.

    --
    David M. Woods, EA
    Boston, MA 02109

    Postings here are general information only and not to be
    relied upon as advice.

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    Dave Woods, EA, Aug 21, 2003
    #6
  7. >> The starting point is simple - what is the AVERAGE rental
    >> period? If it is 7 days or less you MUST use Schedule C,
    >> more than 7 days and you get to use Schedule E. The math
    >> isn't hard.
    >>
    >> BTW - if you find that the average rental period is 7 days
    >> or less RUN, do not walk, to a qualified pro that
    >> understands passive loss activity rules. Schedule C passive
    >> rentals are not for the uninitiated.


    > Gene - Could you elaborate on this a little. Is there a
    > code section or regulation that spells out the "average 7
    > day rental" that requires special treatment? Thanks.


    Reg 1.469-1T(e) (3) (ii) (A) if not materially involved in
    the activity. It specifically is NOT a rental activity at
    that point. Therefore it is a trade or business and a
    passive one because you're not materially involved.

    --
    David M. Woods, EA
    Boston, MA 02109

    Postings here are general information only and not to be
    relied upon as advice.

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    Dave Woods, EA, Aug 22, 2003
    #7
  8. >> The starting point is simple - what is the AVERAGE rental
    >> period? If it is 7 days or less you MUST use Schedule C,
    >> more than 7 days and you get to use Schedule E. The math
    >> isn't hard.
    >>
    >> BTW - if you find that the average rental period is 7 days
    >> or less RUN, do not walk, to a qualified pro that
    >> understands passive loss activity rules. Schedule C passive
    >> rentals are not for the uninitiated.


    > Gene - Could you elaborate on this a little. Is there a
    > code section or regulation that spells out the "average 7
    > day rental" that requires special treatment? Thanks.



    Start with IRC 469(c0(7) then check:
    Treasury Regulation Section 1.469-1T(e)(3)(ii)(A)
    Toups, T.C. Memo 1993-359
    Chapin, T. C. memo 1996-56
    Mordkin, T. C. Memo 1996-187
    Madler, T. C. Memo 1998-112
    Pohoski, T. C. Memo 1998-17

    Gene E. Utterback, EA

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    Gene E. Utterback, EA, Aug 22, 2003
    #8
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